Engaging contractors through their personal companies

If your business engages with contractors who operate through their own personal company then you need to be aware of certain potentially far reaching changes which look set to apply from April 2020.

For many years HMRC have had rules in place that address perceived tax avoidance by individuals providing services through their own personal company (often known as personal services companies or “PSCs”).  These are usually referred to as the IR35 rules and apply where an individual is providing services through their PSC but would in fact be considered to be an employee if they were providing the services directly.  The effect is that the income received by the company is to all intents and purposes treated as if it was employment income and taxed as such.
The IR35 rules are a self-assessment system and HMRC believe that many such PSCs are not applying them correctly.  The first part of their response was the “off payroll working in the public sector” rules which were introduced in 2017.  These rules now require a public sector body to make an assessment of whether the contractor they are engaging through a PSC is in fact in an employment type relationship.  If they determine this to be the case then they are required to treat the payments to the PSC as if they were employment income and apply PAYE, pay national insurance contributions (“NIC”) and so on.  This in effect puts the onus squarely on the payer to determine the status of the payments they are making.
Anecdotally the application of these rules has led to a great deal of confusion and inconsistency between public sector bodies.  Despite this the rules are now set to be extended to large private sector business with effect from April 2020.  Businesses that will now have to make these kind of employment status decisions are companies with more than 50 employees, turnover of more than £10.2 million or assets of £5.1 million.  The rules will also be extended to unincorporated business such as partnerships, although the precise criteria here are still not known.
These decisions are not easy and each will depend upon its own specific facts and circumstances.  There is a large body of tax case law that addresses these situations and while there are some typical pointers there is no hard and fast rule as to what constitutes employment as opposed to genuine contracting.  There is no quick fix in determining the application of the rules in any given situation.  If your business is of sufficient size and engages with contractors through their PSCs then the new rules are expected to apply from April 2020. 
In preparation for that time you may need to consider:
• What process will you adopt to identify any PSCs you are dealing with?
• How will you determine whether those engagements are employment-like relationships to which the new rules will apply?
• What will be the financial impact on your business (for example from paying employer’s NIC)?
• How will you deal with these employment-like relationships through your existing payroll and employee benefits systems?
• How will you communicate the position with any affected contractors?
The fine detail of the new rules is still subject to consultation but it seems unlikely the government will backtrack now.  Although HMRC may initially adopt a “light touch” when policing the system, it is likely to be critical to be able to show, as a minimum, that your business has considered the impact of the new rules and made a reasonable effort to apply them.  Failing to do this is likely to lead to financial penalties.
Whittingham Riddell can help you to:
• Understand the likely impact on your business of these rules
• Help you develop processes to identify any potentially affected relationships and make the necessary assessments
• Advise you on the integration of any affected relationships into your existing payroll systems and
• Assist you in communicating with any affected contractors.  
If you would like an initial free of charge discussion as to how the new rules may apply to you then please contact Paul Brown
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